Fiscal policy: A means toward an end

When discussing the reforms from the New Deal era, many pundits who lean toward the right side of fiscal policy claim that President Roosevelt’s programs did little to improve the economy and actually slowed the recovery. Although the New Deal reforms were not perfect—many were quite regressive, deriving their funding primarily from taxes on poor people, and most excluded minorities from the benefits—the idea that government policy should focus primarily on optimizing economic efficiency discounts the end result that our society should seek.

Programs like Social Security and policies like the minimum wage may lead to inefficiencies, but they deliver a more equal world. Efficiency versus equity, often discussed as the primary tradeoff in public sector economics, must be balanced effectively, yet fiscal conservatives stress too strongly the need for efficient markets. Economic efficiency is not an end in and of itself; an economy is a means toward an end. Employment, growth and stability give people security and meaning in conducting their private lives, but comparing economic indicators, such as gross domestic product, makes us lose sight of more important measures of what makes a good society. There are a number of indicators that calculate how happy a country’s citizens are, such as gross national happiness, that tell more about whether a country’s policies are positively impacting its citizens.

High economic output (GDP) also does not mean that everyone is sharing in the success of a country. The United States may produce more than the Nordic states of Europe, but these countries tend to have happier citizens and more equal societies. Despite the growth that the U.S. economy has exhibited in the past few decades, inequality has grown immensely, and many people are still suffering.

Some of the ways to reduce inequality will sacrifice economic growth to achieve redistribution of wealth. Progressive taxes—when the government taxes wealthy individuals at a higher rate than those less so—are less efficient than flat taxes because they draw in less revenue for the same tax rate. Even so, they are needed to create a fairer society.

Research suggests that they do not have the negative impacts on economic growth that some conservative pundits have asserted. There is little evidence that high taxes on wealthy individuals impact the economy. In 2012, the Congressional Research Service, the public policy research division of the Library of Congress, released a report that identified no correlation between tax rates on the rich and economic growth and unemployment.

Moreover, taxing the rich more heavily might even lead wealthy employers to pay their workers better. Writing in the National Bureau of Economic Research, scholars Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva find that, as tax rates on high-income earners decrease, the wealthy have a greater incentive to fight for higher salaries, leading to greater income inequality. This incentive leads those with greater means to pursue business practices that serve their interests rather than letting growth actually trickle down.

Alana Semuels, writing in a September 2016 “Atlantic” issue, says that “trying to achieve incredible returns for those at the top can motivate companies to make changes in the way they run their business, such that they employ fewer people.” In the financial industry, lower taxes on the wealthy have led these individuals to spend less time on creating actual growth and more time on manipulating markets. Lower taxes on capital gains also means that the financial sector endeavors are more profitable but don’t make as many jobs.

Some social programs might lower economic output and company profits, but we should not measure our country’s success in these simple economic indicators. We should qualify our country’s success by ensuring the greatest welfare of our citizens.